Expectations that the Reserve Bank of New Zealand will raise rates even further to curb inflation are fueling the currency’s rise. That and hopes that a relaxation of China’s one-child policy will drive China’s thirst for New Zealand milk ever higher have pushed the Kiwi, as New Zealand’s dollar is known, up 7% against the U.S. dollar since January.

With so much riding on China’s development, it’s small wonder policymakers in Wellington are nervous about China’s economy.

As China wrestles with how to overhaul its economy and deflate a credit and investment boom amid an economic slowdown, “I fear there will be some point in these reforms where there will be a disruption,” Grant Spencer, the RBNZ’s deputy governor, said at the Credit Suisse Asian investor conference in Hong Kong last week. “You could see significant periods of turbulence in financial markets potentially affecting growth in China – and in commodity prices that would hurt Australia and New Zealand.”

Strong exports and a rising currency have helped pull New Zealand’s current-account deficit down to 3.4% of GDP, from 4.1% last September. That’s helped reverse the $3.58 billion in portfolio cash that drained out of New Zealand in the second quarter of 2013 as investors reacted to the likelihood of higher U.S. interest rates. Foreign investors pumped $4.17 billion back into New Zealand in the second half of the year.

But a strong currency and rising rates aren’t all good for an economy like New Zealand’s. Higher rates will make life tougher for mortgage holders, particularly as restrictions on property lending the RBNZ imposed in October have pulled down housing prices, as measured by the Real Estate Institute of New Zealand’s housing price index.

Exporters also get hurt as the cash they earn abroad translates into less domestic currency. The combination of high prices for the milk it buys from farmers and a strong Kiwi, for example, combined to halve net profits in the six months ended Jan. 31 at New Zealand’s giant dairy cooperative, Fonterra.

And as Australia has discovered in recent years, a sustained boom in commodity exports and a rise in the currency can sap the competitiveness of a country’s manufacturers, pushing more workers and investment into basic industries – a phenomenon known as “Dutch disease.”

So far, China’s demand for agricultural commodities like milk appears to be undiminished by its slowdown – even as demand for industrial commodities like copper and iron ore suffer.

But New Zealand’s ability to feed that growing demand has its limits, according to Hayley Moynihan, director of dairy research at Rabobank in Christchurch.

“While China certainly does have a preference for NZ product, the volumes that China now requires (and in the future) cannot be met by NZ alone,” she wrote in an email.

Indeed, with more production coming from Europe, the United States and Brazil, Rabobank predicts milk prices will fall from 10% to 15% over the next year.

New Zealand may discover there’s a risk to putting all your eggs – or milk – in one basket.

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